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Abstract<\/span><\/strong><\/span><\/p>\n Cash flow is central to construction projects and is enabled primarily through timely payments to all project stakeholders. Payment delays are endemic in the construction industry worldwide and cause cash flow problems, disputes, bankruptcies, cost overruns, and delays in the construction project.<\/span><\/p>\n Various countries across the world have formulated legislative and contractual solutions to enable timely payments in construction projects. Legislative solutions are like enacting the Construction Law\/Construction Contract Act\/Security of Payment Act which provides certain rights to contractors and subcontractors in case of delays in payment and fast interim binding dispute resolution methodology during the project\u2019s currency. Contractual solutions are about adopting a standardized balanced contract of the correct type, which give equitable rights to all contractual stakeholders and a fast interim binding dispute adjudication mechanism.<\/span><\/p>\n India has a vast infrastructure drive and faces tremendous cost overruns, delays and disputes in construction projects. However, the country has not explored and adopted any legislative solutions that have worked successfully elsewhere. This blog post provides an overview of these solutions, which have been successful in other countries facing similar problems as India in its construction industry, with food for thought about whether these solutions will be successful for the Indian construction industry.<\/span><\/p>\n Keywords:<\/em> Construction Projects, Payment Delays, Disputes, Construction Law<\/span><\/p>\n <\/strong><\/p>\n A Brief Background on the Genesis of Construction Law<\/strong><\/span><\/p>\n In the early 1990s, Britain was facing an acute recession. The construction industry was the first to suffer the effects of the recession and last to recover. The significant impact of the recession on Britain\u2019s construction industry was an environment of \u201cbid low claim high\u201d wherein contractors and consultants sought to obtain contracts at all costs, often at a loss, expecting the profits to recoup through claims as the project progresses. This approach resulted in many disputes, ultimately resulting in delays and cost escalations in construction projects.[1]<\/span><\/p>\n At this time, in 1994, Sir Michael Latham, an MP in British Parliament, brought out a report written with joint inputs from government departments, private employer agencies, contractors\u2019 associations and various other representatives of the construction industry, titled \u201cConstructing the Team.\u201d[2] Apart from the other recommendations, this report advocated a Construction Law for Britain intending to have \u201cbalanced contracts,\u201d enable timely payments to all stakeholders of the construction project and have a faster resolution of disputes. It is widely acknowledged that implementing significant recommendations of this report, including enactment of Construction law, helped transform the landscape of Britain\u2019s construction industry.[3]<\/span><\/p>\n In the following, the author shall discuss the lifeline of construction projects \u2013\u2013 cash flow \u2013\u2013 and shall scrutinize the significant outcomes of delayed payments.<\/span><\/p>\n Lifeline of a Construction Project \u2013 Cash Flow<\/strong><\/span><\/p>\n Cash flow is the central lifeline of a construction project. [4] Cash flow enables that correct and timely payments are made to all project stakeholders. Timely payments assume greater significance in construction projects due to long gestation periods and a prominent number of stakeholders having contractual, \u201cquasi-contractual,\u201d and non-contractual relationships with each other as shown in Image 1.<\/span><\/p>\n Delays in payments are endemic in construction projects all over the world. [5] European commission\u2019s report on Payment Behaviour in Business-to-Business transactions, 2018, reported that the construction industry is the most affected by payment delays, with 65% of stakeholders having experienced delays. [6] Extensive research across the world has shown that payment delays lead to four significant outcomes:<\/span>\u00a0<\/span><\/p>\n These outcomes are accentuated manifold in times of recession.<\/span>\u00a0<\/strong><\/p>\n In the following, the author shall briefly discuss the \u201cConstruction Law\u201d of the UK by describing its salient aspects and impact on the construction industry.<\/span><\/p>\n The Construction Law of United Kingdom: UK Housing Grant, Regeneration and Construction Act (HGCRA) 1996<\/span><\/strong><\/span><\/p>\n One of the outcomes of the report by Sir Michael Latham [7] was the enactment of the UK\u2019s Housing Grant, Regeneration and Construction Law (HGCRA) 1996, also called the \u201cConstruction Law.\u201d [8] Salient aspects of the Act include:\u00a0<\/span><\/p>\n The net effect of HGCRA and other measures taken by the UK is a 30% rise in productivity and a massive drop in disputes referred to arbitration and litigation. During the period 2002-2012, out of 15000 cases referred to 28-day interim binding adjudication, less than 300 were appealed in arbitration\/litigation. [9]\u00a0<\/span><\/p>\n In the following, the author shall discuss the Security of Payment Act – the legislation aimed to ensure timely payments in construction projects – and its variants developed by various countries.<\/span><\/p>\n <\/strong><\/p>\n The Enabler of Timely Payments: Security of Payment (SOP) Act<\/strong>\u00a0<\/span><\/p>\n This legislation primarily aimed at enabling timely payments to stakeholders in construction projects is called the \u201cSecurity of Payment (SOP) Act.\u201d Various countries have made their legislations like the SOP Act on the same lines as the HGCRA in the UK.<\/span><\/p>\n The HGCR Act, 1996 [10] requires the payment to be made to the payee within 5 days of the due date and in case of reduced payment a \u2018pay less\u2019 notice is required to be given by the payer within 7 days. Based on a similar framework, The Construction Contract Act (CCA) 2002 (New Zealand) [11] and Western Australia Construction Contract Act (CCA) 2004 [12] have been formulated. These require that the response to the claim of payment should be made by the contractor (called payment schedule) and payment should be made within 20 days and 10 business days, respectively.\u00a0<\/span><\/p>\n In Singapore, The Singapore Building and Construction Industry Security of Payment Act 2004 [13] necessitates the payment response to payment claim to be made within 7 days and payment within 21 days and similarly, the Construction Lien Act 2017, Ontario [14] asks for payment to the contractor to be made within 28 days of payment claim and to the subcontractor within 7 days of contractor receiving the payment.<\/span><\/p>\n Malaysia is the only developing country to have a proper act to deal with SOP Legislations. Under the Construction Industry Payment and Adjudication Act 2012 [15] the payment response to a payment claim can only be done within 10 days.<\/span><\/p>\n Through these few examples we can summarise the SOP Acts legislated by various countries for the Construction Industry.<\/span><\/p>\n Coming to dispute resolution for any inconsistency that arises, these legislations have specific dispute resolution clauses. These acts specify the rights and the time that is to be taken for adjudication of disputes in an ideal situation.\u00a0<\/span><\/p>\n Taking up the same acts as mentioned above, the HGCRA 1996 UK, provides for a right to refer any payment related dispute to adjudication anytime during the currency of the contract. There can be an interim binding adjudication decision given within 28 days. The CCA, 2002 of New Zealand has the same provision as given in the HGCRA 1996. For Western Australia, the same right as under the HGCRA 1996 is provided with the only difference of adjudication period. The Western Australia Construction Contract Act (CCA) 2004 makes 10 business days as the limit to make an interim binding adjudication. For Singapore, Ontario and Malaysia, adjudication decision is to be made within 14, 30 and 45 working days, respectively.\u00a0<\/span><\/p>\n Studies conducted by various institutes and Government committees have shown that all these SOP legislations have had a moderate to a high positive impact on the construction industry. This impact was in terms of productivity, cost escalation, time delays and disputes, and even behavioral changes that created better relationships among stakeholders. [16]\u00a0<\/span><\/p>\n In the following, the author shall describe the USA\u2019s variant of the SOP Act alongside discussing its Construction Law.<\/span><\/p>\n <\/strong><\/p>\n The state-wise Legislations Model of the USA: A Unique Variant<\/strong><\/span>\u00a0<\/span><\/p>\n While the USA does not have a Federal construction law, it has state-wise legislation to ensure timely payments in construction projects. These are of three types:\u00a0<\/span><\/p>\n 1. Prompt Payment Acts (PPA):<\/strong>[17]<\/a> These are similar to SOP Acts, which give legal rights to the contractor to suspend performance for non\/delayed payment and resort to expedited arbitration, irrespective of what the contract lays down. The most famous of these legislations is the New York PPA, 2003.<\/span><\/p>\n\n
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